Here’s an interesting accounting question: How much money does a Canadian home buyer need to earn just to pay the government-imposed charges on a new house?

To calculate the real cost, you must also consider that these charges are typically financed as part of a mortgage and paid back over the life of the loan. In addition, because mortgage interest is not tax deductible in Canada, these loan payments are made using after-tax dollars.

As you can imagine, the total grows exponentially as you factor in how much gross income it really takes for a new home buyer to cover these costs.

While pondering the magnitude of this calculation, it’s also worth noting that the same homeowner is further contributing to the government coffers by concurrently paying ever-increasing property taxes — again using after-tax dollars. While this is a different government-imposed tax and not strictly related to new housing, it still contributes to the financial burden the Canadian government inflicts on its homeowners.

These fees not only add to the total purchase price of a new home, they also are incongruous with current government debates on affordable housing, inclusionary zoning, and related initiatives. Indeed, the “real” cost of these mandated fees is magnified when you consider how they thwart efforts to create affordable housing.

 

According to the most recent research study conducted by Canada Mortgage and Housing Corporation in 2006, government-imposed charges on new Canadian homes can be as high as 18 percent of the purchase price. These costs have continued to rise since this study was conducted, as there seems to be no end to the taxes, fees, levies, and charges each level of government dreams up. In addition, the introduction of the Harmonized Sales Tax (HST) in British Columbia and Ontario (effective July 1, 2010) will also add to the cost of homes priced above the rebate threshold. Alarmingly, government-imposed charges on new homes could exceed 20 percent of the total home price in some parts of Canada this year.

These government-imposed costs come in a variety of shapes and forms and also from various levels of government. While by no means comprehensive, the following is a brief overview of these different charges.

1. Municipal and regional level costs

Infrastructure charges: These include hard costs for water, roads, and sewers, as well as soft costs for things such as parks, libraries, and facilities for emergency services. Development charges, subdivision agreements, engineering review fees and other inspection fees also fall into this category.

Land dedications: These include the municipal costs associated with land dedications or cash in lieu of the dedications.

Development application charges: These include all of the application and processing fees for site plan approvals, subdivision/condominium applications, and various other administration fees.

Building permit fees: These are the charges generally related to review and issuance of a building permit, along with electrical or mechanical permit fees.

2. Provincial level costs

Home warranty fees: These costs comprise new home warranty licensing fees, as well as home enrolment fees.

Registry/land transfer fees: These are costs associated with land transfer taxes and other title registration fees.

Provincial sales taxes: This item varies in form across Canada, but consists of either the Provincial Sales Tax on construction materials or a portion of the Harmonized Sales Tax on the sale price of a house.

3. Federal level costs

Goods and Services Tax: This item also varies in form across Canada, but consists of the Goods and Services Tax collected on the sale price of a new house, or a portion of the Harmonized Sales Tax.

Identifying and naming each of these government-imposed charges is one thing, but putting actual numbers to them really drives the point home.

Now, if you apply this information to our original accounting question, it becomes quite apparent how these costs can really impact a home buyer. If you take the $101,526 of government-imposed charges amortized over a 25-year mortgage, with a 6 percent interest rate and monthly mortgage payments, these charges create about $93,345 in interest over the course of the mortgage, making the total cost of these charges closer to $195,000.

Consider the fact that mortgage interest is not deductible in Canada and the numbers become even more staggering. For example, a Toronto homeowner with a gross income between $85,000 and $100,000 would have an average income tax of 26 percent. That means that the home owner would need about $263,000 in pre-tax income to pay the $195,000 of financed,  government-imposed charges.

The residential construction industry in Canada has been a leader in the recent economic recovery and contributes significantly to the Canadian economy, generating jobs, wages, investment, and government revenues. Every housing start in Canada generates nearly three people-years of employment — or nearly three full-time jobs for one year. Each new single-family detached home start on average will have 109 different trades people performing onsite job functions. In total, new home construction, renovation, and related fields combine to be one of the largest employers in Canada, providing $45.2 billion in wages for Canadians.

But home builders need home buyers to keep fuelling this economic engine. It seems counter-intuitive for governments at all levels to regularly impose new charges that increase the cost of new housing, while simultaneously pressing toward various policies on affordability. Such policies have a dramatic impact on housing choice and affordability, thereby influencing economic performance, as well as, ironically, government revenues. In addition, from a socio-economic perspective, 21st Century economies require housing affordability and choice to attract and retain private investment and skilled people. After all, we are competing in a world economy now.

The government‘s practice of reaching deeper into the pockets of new home buyers is not a sustainable formula for government revenues or for the home building industry. Maintaining or improving affordability helps to secure future investment by home buyers, driving an increased tax base for governments while also maintaining the home building industry as a vibrant contributor to the Canadian economy. The rationale that “growth must pay for itself” loses all validity if that payment becomes unaffordable for consumers. It may be time for governments to consider getting a charge out of being less of an imposition.

They might start by being honest with the public about just how much of the price of a home is imposed by government, rather than blaming builders for the affordability crisis. Then they could follow that up by cutting fees (tightening their own belts) before they demand that builders solve the affordability problem.

Tim Bailey is general manager of AVID Canada, the leading provider of customer loyalty research and consulting to the home-building industry. Through the AVID system, home builders improve referrals, reduce warranty costs, and strengthen their brands. He can be reached at tim.bailey@avidglobal.com.